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Income Tax Return Filing For Futures And Options (F&O)Traders : All You Need To Know

19 January 2022

Trading in futures and options on stocks, currencies, and commodities are subject to tax but due to the lack of awareness and knowledge, many small traders fail to report their losses from F&O trading during ITR filing. Let us have a look at the important points to note regarding tax aspects of future and option trading.

Reporting Of F&O Gains And Losses.

Many taxpayers commit the mistake of not reporting their gains or losses from F&O trading. However, gains earned from such trading will be considered under the head income from other sources, that if not reported, may invite a notice from the Income Tax Department, for non-compliance.

While it is mandatory to report gains, reporting losses can lead you to enjoy some tax benefits too.

How To Report F&O Trades As?

Unless you have made a few trades in the financial year, say 2-3, trading in futures and options has to be reported as a business while filing your returns. This shall be applicable even if you are formally incorporated as a company since individuals or salaried people can also have business income.

ITR-3 would be required to file to account for this business income, however, do check your ITR eligibility correctly based on your income as there are slight changes every year. Now since you are reporting future and option trading as a business, you are also eligible to claim expenses from the earnings of your business.

Expenses You Can Claim

One of the best things about filing income tax returns as a business is that you can claim what you have spent for the business purpose.

Some of the expenses include – brokerage, broker’s commission, subscription cost, telephone cost, interest expenses, consultancy expenses, the salary of people supporting the business, and the likes.

One can claim these expenses while assessing taxable income.

However, it is necessary to maintain a proper record of expenses and bills. Also, any expenses over Rs 10,000 in cash are generally not allowed to be claimed.

Income Computation

As someone who may be involved in several stock market avenues such as intra-day trading or buying shares for the short term or long term, the tax treatment of each activity will be different.

For instance, if you do intraday trading then you must report the gains (or losses) as business income. Similarly, high-volume short-term trading in equity shares will also be treated as a business.

On the other hand, you may also incur capital gains income if you have sold long-held equity shares or have fewer short-term equity shares sales.

Therefore, based on the nature of the trades, volume, duration, the computation of income will be different.

Accounting Requirements

Since F&O trades are meant to be declared as a business, you would be required to adhere to some mandatory tax compliance in this regard.

Suppose you are running the business as an Individual or a HUF. If your income exceeds Rs. 2.5 Lakh or gross receipts exceed Rs 25 Lakhs, in any of the 3 preceding years or the first year of business if it’s new, then you are required to maintain proper books of accounts.

However, for taxpayers carrying on a business other than HUF or an Individual, the income limit is Rs. 1.2 Lakhs, and the gross receipts limit is 10 Lakhs.

So ensure that your trading statements, bank statements, and expense receipts are handy since from these documents your P&L balance sheet will be prepared.

Audit And Return Filing

For the majority of taxpayers, income tax returns are meant to be filed by July 31st every year for the previous fiscal. For instance, for fiscal 2022, the returns should be submitted by July 31, 2022.

However, for entities where an audit is required, the last date is September 30.

According to the laws, an audit applies to a business if its turnover is more than Rs. 1 crore. So if you fall in the segment, you need to appoint an independent Chartered Account for audit purposes.

While filing returns, the assessee is required to submit the audit report along with the tax return. Also, if you do not maintain proper books of accounts, a penalty is imposed by the department.

Tax Benefits: Losses Can Be Set-off And Carried Forward

One of the most important reasons why people should file with future and option trading is to be able to obtain the benefit of losses incurred.

If the business results in a loss, you can always adjust it for the profit that may come from different other heads such as rental income, interest income, and the likes except for any salary income.

If there are any unadjusted losses, they can be carried forward for 8 years. However, in the future, they can only be adjusted from non-speculative income (F&O trading loss is considered non-speculative, and intraday stock trading loss is considered speculative).

Understand this with an example,

Mr. A, after hearing from a friend, opened a trading account with a broker by paying Rs 500 as account opening fees and annual charges.

The broker mentioned 0.02% as a brokerage for every F&O trade. A paid nearly a lakh as brokerage during the year and incurred around Rs 25000 towards his telephone bills.

On skimming through the statements, Mr. A found that 50% was towards the F&O trade. Also, Mr. A has a high-speed internet connection at his home for which he sheds a grand per month.

When checking on the fiscal year profit and loss, Mr. A found losing Rs 2 Lakhs from F&O trade of the total turnover of Rs 20 Lakhs.

Mr. A is unsure if he should report the loss. Also, Mr. A, in addition to his salary (Rs 2 lakh per month) earns Rs 75000 as interest income and Rs 1 Lakh as rental income.

So, as mentioned above, Mr. a should report the loss to take the benefit. His F&O expenses would be as below –

  • Brokerage enrolment charge – Rs 500
  • Brokerage – Rs 100000
  • Telephone expenses – Rs 12500 (50% of Rs 25000)
  • Internet – Rs 12000 (1000×12)
  • Total = 125000

Let us now see the computation of taxable income –

  • Loss from F&O – Rs 2,00,000
  • Less: F&O expenses – Rs 1,25,000
  • Total F&O loss Rs 3,25,000

Thus, the total taxable income for Mr. A is –

  • Salary Income – Rs 24,00,000
  • Rental income – Rs 1,00,000
  • Interest income – Rs 75,000
  • Non-speculative loss – Rs 3,25,000
  • Total taxable income Rs 24,00,000

Loss to be carried forward – Rs 1,50,000 (-3,25,000 + 1,00,000 + 75,000)

In this case, income from the business is Rs (1,50,000). The presumptive income @ 6% of his turnover is Rs 1.2 lakhs, which is more than Rs (1,50,000).

Also, the total taxable income is Rs 24 Lakhs, which is higher than the basic exemption limit of Rs 2.5 lakhs. Thus, a tax audit becomes and filing of balance sheet and profit and loss in the income tax return become mandatory in such a case.

Conclusion

If you are an intra-day trader, ensure to report all your gains and losses while filing your income tax returns to avoid penalties and notices from the IT department.

If you find it difficult to assess your tax liability, consult an experienced Chartered Accountant for your requirements.

Disclaimer: The information related to the tax filing presented in this blog post is generic. Please consult your tax advisor for tax filing advice about your case. The views expressed here are of the author and do not reflect those of Groww. 

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